Sears Investors Should Consider How Past Going Concern Warnings Played Out In The Market

Sears Holdings Corp SHLD shares are up an incredible 28.6 percent since the company’s annual report on March 21. Shares initially fell more than 8 percent on concerns about one statement in particular:

“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern.”

'Going Concern'

"Going concern" is an accounting term that refers to a company’s ability to continue to operate in a manner that will allow it to avoid bankruptcy. In other words, Sears now has (official) internal doubts about its ability to survive in the long term.

Sears’ positive initial reaction to the news is likely driven by market dynamics rather than company fundamentals. According to shortsqueeze.com, Sears’ short percent of float currently stands at an incredibly high 79.7 percent. Shares remain down 91.5 percent in the past 10 years, and the going concern warning doesn’t bode well for the company’s long-term outlook.

Not Equivalent With Bankruptcy

A going concern warning doesn’t necessarily mean bankruptcy is imminent.

Blockbuster Inc received a going concern notice from the SEC on April 6, 2009. The company officially filed for bankruptcy on September 23, 2010, roughly 17 months later.

RadioShack issued its own going concern warning to shareholders on September 12, 2014. General Wireless Operation, the company which owns Radio Shack’s remaining assets, was reportedly preparing for bankruptcy as of a month ago.

Earlier this year, reports surfaced that Toshiba Corp (USA) TOSYY would be issuing a going concern warning. Its stock is up 3.8 percent in the past month.

DryShips Inc. DRYS shares may be down 99.99 percent in the past decade, but the stock is still trading after issuing a going concern warning way back in March 2009.

American Apparel issued a going concern warning to shareholders in August 2010 and didn’t officially declare bankruptcy until October 2015.

Sears bulls point out that the company’s auditor has yet to issue a going concern warning for the company, but California Public Employee’s Retirement System portfolio manager Anne Simpson says going concern warnings from corporate auditors are “rarer than a hen’s teeth.”

“You have to be dangling off a cliff, hanging on by your fingernails before the auditor blows the whistle,” Simpson said.

Bear Stearns, Lehman Brothers, Washington Mutual and Wachovia are all examples of companies that fell victim to the 2008 financial crisis without a single going concern warning from auditors.

The Bottom Line For Sears

Sears to getting out ahead of its auditors and warning shareholders on its own may not be the death knell for the stock, but it’s beyond troubling. Long-term Sears investors may want to take advantage of the post-news bounce in share price to reassess their stakes in the struggling retailer and reconsider the company’s long-term viability.

The Latest Top Hot Short Ideas: Sears And Credit Acceptance

Total Number Of Store Closures In 2017 To Break 2008's Record Of 6,200: Does This Even Matter? _________ Image Credit: By Jonrev at English Wikipedia [Public domain], via Wikimedia Commons